Swaps Collateral Costs May Increase Under SEC Proposal

Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and other trading firms would face higher capital and collateral costs under swaps-market rules proposed by the U.S. Securities and Exchange Commission.

SEC commissioners voted 5-0 yesterday at a meeting in Washington to seek public comment on collateral requirements for swaps that remain in the over-the-counter market instead of being settled at third-party clearinghouses. The proposal, part of the agency’s rulemaking under the Dodd-Frank Act, would also increase capital requirements for dealers of swaps tied to single securities or loans or a narrow index of swaps.

“These rules are intended to make the financial system safer, and the derivative markets fairer, more efficient and more transparent,” SEC Chairman Mary Schapiro said before commissioners voted on the proposal.

The SEC and Commodity Futures Trading Commission are leading U.S. rulemaking to limit risk and boost transparency after unregulated swaps contributed to the 2008 credit crisis. The SEC has authority to regulate equity and credit-default swaps, while the CFTC oversees interest rate, broader indexes of credit-default swaps and commodity trades.

Dodd-Frank, the 2010 financial-regulation law, calls for most swaps in the $648 trillion market to be guaranteed at clearinghouses that hold collateral from buyers and sellers to cut default risk. The SEC is the last U.S. regulator to propose collateral requirements for non-cleared trades.

Largest Brokerages

Under the proposal, dealers in swaps tied to securities would need to set aside a fixed amount of capital and a percentage of collateral. They would be required to have capital equal to an additional 8 percent of collateral for cleared and non-cleared trades.

All swap dealers would need to have at least $20 million in fixed net capital. Bigger and more complex brokerages that use internal computer models to comply with capital rules would need to double minimum capital from $500 million to $1 billion.

The SEC is also seeking comment on how dealers collect margin from each other. The agency is asking whether dealers need to collect both variation and initial margin. Initial margin is posted at the beginning of a trade, whereas variation margin may be exchanged daily to offset risk from price movements. The proposal allows cash, securities and money-market instruments to be used as collateral.

Under the proposal, dealers wouldn’t need collect to collateral from commercial end-users whose swaps aren’t cleared.

The Basel Committee on Banking Supervision, an organization representing international securities regulators, called in July for consistency in global rules governing collateral for derivatives.

The $648 trillion figure is the total notional amount outstanding of over-the-counter derivatives through December 2011, according to the Bank of International Settlements, a Basel, Switzerland-based organization that promotes global financial collaboration and serves as a bank for central banks.

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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